"Man is a creature who lives not upon bread alone, but princi­pally by catchwords," wrote Stevenson three-quarters of a cen­tury ago. Economic debate is a running record of the correctness of his statement. One catchword after another takes the popular fancy, is bandied about as if it were the final expression of truth, becomes the slogan for a variety of debatable proposals, is gradual­ly subjected to the cold light of analysis, loses its glamour, and passes into the discard, to be fol­lowed by another magic phrase.

Among the catchwords in great­est favor at the moment is "eco­nomic growth." Like other catch­words, it expresses or implies an objective which is obviously desir­able in itself. It is harmful only to the extent that it comes to be regarded as describing a new and epoch-making discovery that supersedes old rules and prin­ciples, and hence is used to justify specific measures that violate these rules and principles.

What Economic Growth Means

Economic growth is usually dis­cussed in terms of what the De­partment of Commerce calls the gross national product, the total estimated money value of all goods and services produced in the United States within a specified period. Unfortunately, money is the only common denominator available to measure the wide variety of goods and services pro­duced. Money, however, is a very imperfect unit of measurement because the value or purchasing power of money changes as prices rise and fall. Variations in the gross national product, therefore, reflect two sets of changes: changes in the amounts of goods and services produced and changes in the prices of these goods and services.

To overcome this difficulty, the Department of Commerce esti­mates the gross national product not only at current prices but also in terms of a hypothetical dollar of constant purchasing power. This is the so-called real national product, a sort of aggregate of what may be roughly thought of as the physical volume of output, although no physical unit of meas­urement is or can be used, and although physical volume has no literal meaning when applied to the output of services.

The real national product, des­pite its admitted vagueness and imperfections, is generally ac­cepted as a useful concept and a fairly good measure of over-all production, and the increase in this product from one time period to another is what is usually meant by economic growth.

Thus defined, economic growth is an objective with which few peo­ple could quarrel. It means more useful things to serve the needs and desires of the people. It is what men have always striven for in their individual lives and what economists have always pointed to as the greatest hope for material progress in the future. It is an idea, an aspiration, and a reality as old as human history. Despite the immense obstacles placed in its way by ignorance, superstition, physical violence, and political in­terference, it has been inter­rupted only temporarily, because it is a product of human nature and normal human behavior.

Growth in a Free Society

In a free society protected against violence and fraud, eco­nomic growth is an automatic process. It takes place as a result of the desire of individuals to bet­ter the material condition of them­selves and their families. In this endeavor, people save, invest, de­vise new and better tools, invent new products and new processes, and employ other people in order to operate more efficiently and on a larger scale. In this respect, in­dividual proprietors and corpora­tions behave in essentially the same way. Under the spur of com­petition and the profit motive, they strive constantly to produce more and better products at a lower cost. The result is economic growth.

For centuries during and after the Middle Ages, this natural proc­ess was retarded, and at times halted completely, by the extreme insecurity of life and property and by tight political restrictions on economic activities. When the sys­tem of state prohibitions and state-protected monopolies now known as mercantilism gave way to a regime of relatively free en­terprise about two hundred years ago, the Western world entered upon a period of unprecedented economic growth. Within decades, the material conditions of life changed more than they had done in centuries of feudalism and mer­cantilism. This almost explosive progress is still going on, and it still owes its vitality to the same individual initiative, the same de­sire for personal self-betterment, the same freedom from paralyzing controls that actuated it from the beginning.

Many Complicating Factors

Economic growth in our complex modern society, while automatic in the sense of being self-generating, is not completely smooth and un­interrupted. It requires balance among many interrelated and in­teracting forces. As saving and in­vestment increase, the supply of productive equipment must in­crease accordingly, and the same is true of the relation between con­sumption and the supply of con­sumer goods. Prospective markets cannot be gauged with perfect ac­curacy, nor can prospective costs. Industry must become familiar­ized with new processes and con­sumers with new products. Workers must find and learn new jobs. There is a constant need for readjustments and the correction of errors, and these corrections take time. For all these reasons, total output can never equal theo­retical capacity. One hundred per cent employment of human and material resources is an imprac­tical dream.

How fast can economic growth occur in practice? Between 1929 and 1957, both of which were years of generally good business, the real national product increased at an average rate of slightly less than 3 per cent a year. This com­pany’s index of business activity, which reflects a long-term rate of growth approximating that of the real national product, rose at about 3.6 per cent a year during the post­war period 1947-57. It is question­able, however, whether such a high rate can be maintained over a longer term, as the postwar years were to some extent a "catching-up" period following the long de­pression of the 1930′s and the war-induced shortages of the early 1940′s. Experience so far suggests that 3 per cent is about as high an annual rate of growth as can be reasonably expected over a long period, although any such answer must, of course, remain subject to revision in the light of future developments.

Danger of Arbitrary Goals

The essential point is that ex­perience must be the guide. No arbitrary rate can be postulated and treated as a national objec­tive. This is where the sloganeers of "economic growth" are tread­ing on dangerous ground. To them, economic growth is not merely a natural and desirable occurrence; it is a program. They would set up a goal based upon theoretical cal­culations rather than practical experience, and in striving to achieve this goal they would make use of fiscal policy, monetary policy, and various forms of cen­tralized planning.

The most popular objective among the "economic growth" en­thusiasts seems to be a growth rate of 5 per cent a year, appar­ently because this is approximate­ly the average rate for the early postwar years when industrial re­conversion from war to peace and the great upsurge in prices were over. This is below the wartime rate of 10 per cent or more achieved under obviously abnor­mal and highly inflationary condi­tions, but it is substantially above the 3 per cent rate based on actual long-term experience. The 3 per cent rate is rejected by the "5 percenters" as inadequate because the long span of years on which it is based included some periods of recession—with the clear implica­tion that such periods can and should be avoided in the future.

Blueprint for Inflation

How would recessions be avoided, according to the 5 per cent school? Principally by mak­ing the 5 per cent growth rate a national objective and shaping fis­cal, monetary, and business poli­cies around it. To begin with, fed­eral spending would be deliber­ately increased at that rate. This rise in federal spending, rein­forced by appropriate tax, mone­tary, price, wage, and profit poli­cies, would cause other types of expenditure to increase according­ly. The increase in total expendi­ture would be matched by equiva­lent increases to output, incomes, and governmental revenue so that there would be no price inflation, no Treasury deficits, no increases in tax rates, and no rise in the ratio between governmental and private spending. The only differ­ence would be that economic growth would proceed steadily at the 5 per cent rate, instead of varying from year to year and averaging out at about 3 per cent, as in the past.

This program is so full of gra­tuitous and unrealistic assump­tions that it would be difficult to know where to begin the list. Its weaknesses might be summarized by the statement that it assumes the feasibility of an arbitrary rate of growth at variance with the testimony of experience, and as­sumes further that this rate could be achieved by inflationary meth­ods that would stimulate without inflating and without causing a "boom-and-bust" cycle.

Actually, the rate of economic growth in a free society is deter­mined by the same factors that cause it, namely, the relative pro­pensity of individuals and busi­ness firms to spend, save, and in­vest. It is the net resultant of a complex set of powerful forces. It cannot be predetermined, and any plan to increase it by fiscal ma­nipulations is simply a blueprint for inflation.

Uninterrupted Boom Impossible

It is easy to understand why theorists become impatient when they contemplate the gap between actual output and full capacity, and why they are prone to devise schemes for closing this gap. Yet it is significant that businessmen are seldom found among propo­nents or adherents of such schemes. Businessmen know by experience that economic freedom includes the freedom to make mis­takes and that only in a society where mistakes are never made can output continuously match full capacity. Economic regimentation offers no solution, because dicta­tors also make mistakes, and their mistakes not only are on a larger scale but also are beyond the dis­cipline of free markets, the great automatic correctors of mistakes. Dictators’ mistakes may not cause unemployment in the usual sense, but they are sure to cause hidden unemployment in the sense of mis­directed utilization of resources.

The desirability of economic growth is not subject to question, and if the United States can achieve a long-term annual growth rate of 5 per cent or even more, so much the better. But when eco­nomic growth becomes a slogan for proposals aimed at uninter­rupted business boom, it becomes a menace to economic stability and economic freedom as well.